MORNING VIEW: Metals consolidate recent gains after risk-on returns amid growing trade optimism

Dovish comments from European Central Bank (ECB) president Mario Draghi combined with some positive US-China trade developments, in that US president Donald Trump said he will meet Chinese president Xi Jinping in late June, to prompt a recovery in equities and industrial metals prices on Tuesday June 18.

Markets are now consolidating while they await direction from the conclusion of today’s US Federal Open Market Committee (FOMC) meeting.

  • EU passenger car registrations rose by 0.1% month on month in May, but were down by 2.1% year on year in first five months of 2019
  • Tension remains elevated in the Middle East

Base metals
Three-month base metals on the London Metal Exchange were for the most part weaker on Wednesday morning, down by an average of 0.5%. This follows a strong rebound on Tuesday that saw the complex close up with gains averaging 1.6%.

Tin led on the downside this morning with a 1% drop, while aluminium was unchanged and copper was off by 0.2% at $5,946 per tonne, compared with Tuesday’s close of $5,956 per tonne. Volume has been above average with 7,443 lots traded as at 7.40am London time.

In China, base metals prices on the Shanghai Futures Exchange were up across the board by an average of 0.5%, led by a 1.2% gain in August copper to 46,820 yuan ($6,768) per tonne.

Spot copper prices in Changjiang were up 1.1% at 46,750-46,870 yuan per tonne and the LME/Shanghai copper arbitrage ratio has fallen to 7.88, after sitting at 7.93 at a similar time on Tuesday. The fall in the ratio highlights the recent strength has been weighted toward LME copper prices rather than SHFE ones.

Precious metals
As sentiment became more risk-on on Tuesday, the spot gold price retreated and was recently quoted at $1,344.98 per oz, compared with Friday’s peak of $1,358.40 per oz. Silver and platinum prices have followed gold’s lead, while palladium continues to rebound and was recently quoted at $1,492.20 per oz, compared with a low in May of $1,267 per oz.

While the risk-on has weighed on gold prices, the tension in the Middle East continues and was increased by a rocket attack on a building in Basra, Iraq’s oil and gas hub.

On the SHFE, the December gold contract was off by 0.3% and the silver contract was up by 0.1%.

Wider markets

The spot Brent crude oil price has edged higher, it was recently quoted at $62.37 per barrel, up by 2.9% compared with $60.61 per barrel at a similar time on Tuesday. The combination of increased optimism over a US-China trade deal and the conflict in the Middle East, could well drive oil prices higher.

Demand for US treasuries remains upbeat, with the yield on benchmark US 10-year treasuries down at 2.0673%, compared with 2.0713% at a similar time on Tuesday. Meanwhile, the German 10-year bund yield still trades in negative territory and was recently quoted at -0.3100%, compared with -0.2549% at a similar time on Tuesday - highlighting the more dovish stance from the ECB.

In Asia, equities were stronger on Wednesday: Nikkei (1.72%), Hang Seng (+2.41%), CSI300 (+1.32%), Kospi (+1.24%) and the ASX 200 (+0.45%).

This follows firmer closes for major US indices on Tuesday, with the Dow Jones Industrial Average up by 1.35% at 26,465.54 and the Nasdaq Composite Index up by 1.39% at 7,953.88.

Currencies
The dollar index remains firm this morning, it was recently quoted at 97.61, compared with 97.40 at a similar time on Tuesday.

The other major currencies we follow are mainly consolidating: the Australian dollar (0.6873), the yen (108.38), sterling (1.2556), while the euro is weaker at 1.1200.

The yuan is firmer at 6.9043, compared with 6.9267 at a similar time on Tuesday, which highlights the optimism on trade talks.

Key data
Today’s key data includes the German producer price index which came in at -0.1%, compared with 0.5% previously. Data out later includes numerous UK price indices, the Confederation of British Industry (CBI) industrial order expectations, with US data including crude oil inventories and the FOMC’s statement, economic projections, interest rate decision and press conference. In addition, ECB President Draghi is speaking at 3pm London time.

Today’s key themes and views
We said on Tuesday “business sentiment looks set to remain depressed until there is some progress on US-China trade negotiations” and that turned out to be true with the announced meeting between Trump and Xi prompting some buying and short-covering.

But the fact the ECB is having to turn more dovish and the FOMC is expected to be dovish too, highlights the fragile state of the major economies. In this climate demand is likely to remain weak and the fact we have been close to trade deals only for them to fall apart, may mean consumers now wait for a concrete deal before committing to restocking.

After the rapid run-up in the price of gold that has seen it climb to a high of $1,358.40 per oz, from $1,275.08 per oz on May 30, a gain of 6.5%, the price may well need to consolidate while it waits to see how the Middle East and economic situations unfold.

base metals
precious metals

macroeconomic data

William Adams

william.adams@fastmarkets.com

Published

William Adams

June 19, 2019

10:55 GMT

London